Business Page – June 20, 2004

GT&T: A slumbering giant Part III As GT&T goes up, so does ATN

Introduction

Today we
return to our series on Guyana Telephone & Telegraph Company Limited (GT&T),
the country's monopoly telephone service provider. Because the company
refused Business Page's request for a copy of the company's 2003 annual
report, this review is limited to GT&T's financial statements for the year
2002 which were audited by Deloitte & Touche, and the Form 10-K Report filed
by GT&T's parent company ATN with the US Securities and Exchange Commission.
It is one of the ironies of the GT&T tale that the government as minority
shareholder, and the PUC as the utilities regulator, can find far more
information on GT&T by going to the parent's filing in the US than
from a review of the company's financial statements.

The 2002
financial statements assure the reader that the accounts comply with
International Accounting Standards. The absence of such an assertion in the
auditors' report (which is a requirement in auditing standards and common
among the other major public accountants in Guyana)
does not exonerate the auditors from several cases of non-compliance which
any serious review of those statements reveals. These include such basic
issues as the date the financial statements were approved for issue, and the
number of employees, movement in fixed assets and better disclosure of
accounting policies on key areas of the financial statements such as
turnover. The approval is particularly important where the board includes
minority shareholder representatives who may not always be satisfied with
the decisions of the majority and find the consideration of the financial
statements an opportune time to express their discomfort.

Interestingly, while the company has chosen the US dollar as its functional
currency, no US Dollars financial statements are presented. International
Accounting Standards do allow for a choice of functional currency in defined
circumstances, but it may be argued that for statutory tax and reporting
purposes, such statements are not acceptable since they may be contrary to
the laws of Guyana.
The justification it uses is that "the majority of the company's
transactions are denominated in US dollars," a case which could apply to a
number of companies in the export business such as Guysuco.

In
addition to the requirements of the Companies Act and by extension
International Financial Reporting Standards, GT&T has reporting obligations
under both the Public Utilities Commission Act and the GT&T Licence. Section
48 of the PUC Act provides that "the Commission may by rules prescribe the
forms of all books... accurately and faithfully in accordance with
internationally accepted accounting principles in
Guyana..."

And
Section 20 (2) of the licence requires the company to maintain separate
accounting for "the activities of the Supplemental Services Business, the
Systems Business and the Apparatus Supply Business," while Condition 20.2
(c) of the GT&T Licence requires the licensee to "procure in respect of each
of those accounting statements prepared in respect of a complete financial
year of the Licensee a report by the Licensee's Auditor stating whether in
his opinion that statement is adequate for the purposes of this condition" (ie
relating to separate accounting).

20.2 (d)
requires the licensee to "deliver to the Director a copy of each of the
accounting statements and of the reports relating thereto... as soon as
reasonably practicable and in any event not later than six months after the
end of the period to which they relate."

I have
asked the PUC in writing whether such statements are in fact submitted to
them and whether they receive any opinion from the auditors in respect of 20
(2). I am awaiting their response. There is however nothing in the financial
statements or the report of the auditors to indicate compliance with any
orders by the PUC or under licence. In other words, the audited financial
statements do not provide the information required by the licence.

One of
the principal defects of the financial statements is the incredible and
unacceptable absence of information on related parties, including their
names and the volume of transactions either as an amount or as an
appropriate proportion of outstanding items. By now, readers of this column
would be aware of the importance of adequate disclosure of transactions with
related parties - a condition that assumes great importance in regulated
utilities. The financial statements of the parent company show several
companies that would meet the definition of related parties including ATN,
the parent company, Call Home Telecom, Llc, a wholly owned subsidiary of ATN
established in 2002 in the US Virgin Islands to provide United States
distribution and termination of international outbound collect calls from
Guyana, and ATC another wholly owned subsidiary of ATN which operates the
Call Centre at Beterverwagting utilising GT&T's circuits in the Americas II
fibre optic under-sea cable. The financial statements of GT&T do not
identify any income to GT&T for the use of its facilities which could mean
that GT&T's consumers are bearing costs for which there is no matching
revenue.

In fact,
ATN and all its mini-subsidiaries contribute very little to the group and in
its statement to SEC, ATN admits that "substantially all of the company's
consolidated revenues and operating income" are derived from GT&T
operations. This makes it all the more reasonable to understand why the PUC
would have ruled since January 1997 that the company cease paying advisory
fees to ATN and seek to recover over $3.5B paid to ATN between 1991 and
1996. Not only has the company managed to stall this matter in the court,
but it has also continued to pay such fees at the rate of over $3/4B per
year without any action on the part of the PUC since 2001.

2002 performance

Total
operating revenue in 2002 fell by $2.3B or 15.4% to $12.7B with the largest
decline taking place in international long distance revenue ($4.2 B) or 36
per cent. Local network services produced revenue of almost five billion
dollars - an increase of $1.8B or 59% over the preceding year. The reduction
in the settlement rate for US - Guyana
traffic from 85 US cents per minute to 23 US cents per minute resulted in a
substantially reduced profit margin on inbound traffic from the United
States but an increased margin on outbound traffic to the United States.
Another reason for the decline was the virtual elimination of the highly
profitable audio-text service which was widely criticised as immoral and
improper and which had generated unexpected windfall profits to GT&T and ATN.

On the
other hand, revenue from local network services increased by 59% from $3.1B
to $4.9B, mainly as a result of greater usage by consumers and an 8%
increase in fixed subscriber access lines. However, it was in the provision
of mobile cellular telephone service that GT&T saw its largest volume growth
as the number of cellular subscribers increased from 39,206 at January
1, 2002
to 79,915 by the end of the year - an increase of over 100 per cent. The
financial statements do not contain relevant information to permit the
measurement of the profitability of this service but it is clear that the
cellular service is a major focus of the company as another forty thousand
subscribers were added in 2003. By way of contrast, fixed subscriber lines
in 2003 increased by a mere 7.5 per cent.

Total
expenses fell from $9.8B in 2001 to $8.1B, in 2002 as international
long-distance expenses fell by 78% and customer operations expenses by 25
per cent. Corporate operations costs increased from $947M in 2001 to $1.1B
in 2002 while the advisory fee which is calculated as a percentage of
revenue reflected the reduction in revenue.

After
Corporation Tax of $2.1B (or almost 20% down from 2001) net income is $2.2B
compared with $2.8 B in 2001. Even after this reduction, the corporation tax
paid by GT&T was almost twice the combined tax paid in 2002 by the five top
private sector companies in Guyana -
Banks DIH Limited, DDL, Demerara Tobacco Company Limited, GBTI and NBIC!

The balance sheet

Current
assets, ie those assets held in cash or expected to convert into cash within
twelve months of the balance sheet date amounted to $6.2B of which cash
represents $2.6B, though there is no indication of the country and currency
in which the balances are held. Current liabilities which are those
liabilities due for payment within twelve months amount to $3B, meaning that
the company's liquidity position is extremely healthy.

There is
no indication of what other long-term assets of $341M represents, a figure
that is not only significant in itself but also having regard to the
reduction from $1.1B at the beginning of the year. An almost similar
shortcoming is in respect of Accrued Liabilities where accrued interest of
$710,000 is identified while Other is stated at $916M. Net fixed assets are
shown at approximately G$17 B or US$85M while the total shareholders equity
is $18 B.

Dividends

Dividends
declared and paid in 2001 amounted to $2.8 B representing 100% of the net
income for that year while dividends for 2002 of $3.2 B represent 148% of
2002 net income.

Mr Joseph
Tyndall, telecommunications expert, in 2001 had cautioned the government
against euphoria over the company's first payment of dividends after ten
years of highly profitable operations. He attributed the change in policy to
a strategy to weaken public reaction to the expected rate increase following
the cessation of its 'audio-text binge' and the government's announced
intention to bring to an end the monopoly.

As Mr
Tyndall has pointed out, GT&T has employed other means of paying itself -
including the 6% advisory fees which the PUC had ordered stopped. GT&T has
refused to provide information to refute publicly expressed concerns that
this is an effective giveaway since AT&T pays all the costs involved in the
provision of services. Other means used by ATN to extract cash from GT&T
were the charging of prohibitive interest on loans and GT&T's audio- text
operations.

Conclusion

The
accounts of GT&T are not the best for presentation and disclosure, nor do
they facilitate analysis. Business Page considers that they do not meet the
basic requirements of the PUC Act and the Licence nor do they conform with
International Financial Reporting Standards. While Deloitte & Touche audits
substantially all of the revenue and assets of the group, ATN is audited by
PriceWaterhouseCoopers which replaced the disgraced Arthur Andersen as the
parent company's auditors in 2002, and one can only speculate on the degree
of co-operation between the two firms to ensure that the financial
statements of GT&T are complete in every respect.

These
statements clearly require a thorough examination by the PUC and possibly a
hearing on it so that any deficiencies are identified and remedied.